Loss-Making Ericsson Still Short on Vision

Iain Morris
1/26/2017

Ericsson's misfortunes continued on Thursday as the company reported another sharp fall in quarterly sales and swung to a $180 million net loss, blaming weak demand for mobile broadband products and a fall in licensing revenues for the latest setback.

Net sales in the October-to-December quarter dropped 11%, to 65.2 billion Swedish kronor ($7.4 billion), compared with the year-earlier quarter, and would have fallen 15% without favorable currency movements. For all its ongoing restructuring efforts, Ericsson AB (Nasdaq: ERIC) reported a net loss of SEK1.6 billion ($180 million) compared with a profit of SEK7 billion ($790 million) for the same period a year ago.

Table 1: Ericsson's Headline Figures for Q4 (SEK Billions)

Q4 2016 Q4 2015 YoY change
Revenues 65.2 73.6 -11%
− of which networks 32.4 37.3 -13%
− of which services 29.4 30.7 -4%
− of which support solutions 3.4 5.6 -39%
Gross income 17.0 26.7 -36%
Gross margin 26.1% 36.3% -10.2 percentage points
Operating income -0.3 11.0 -103%
Operating margin -0.4% 15.0% -14.6 percentage points
− of which networks 2.0% 19.0% -17 percentage points
− of which services 1.0% 8.0% -7 percentage points
− of which support solutions -12.0% 30.0% -42 percentage points
Net income -1.6 7.0 -123%
Source: Ericsson.

Despite a dividend cut, Ericsson's shares opened 3.9% higher in Stockholm and were trading up 1.8% at the time of publication. Perhaps fearing worse, investors may have taken heart from cost-cutting progress and the expectation that conditions in some markets will prove more favorable this year than last. But the stock has a long way to go before it recovers: Ericsson's share price has lost about 29% of its value during the past 12 months.

The earnings update was the first since Börje Ekholm took charge earlier this month and may have disappointed those hoping Ericsson's new CEO would have more to say on his strategic plans for reinvigorating the ailing Swedish equipment maker. (See Eurobites: Ekholm Takes the Reins at Ericsson.)

Amid some speculation he is preparing Ericsson for an eventual sale, Ekholm confirmed suspicions that a chief focus will be further cost cutting at the company, noting in his official statement accompanying the quarterly results that he plans to prioritize "profitability over growth." (See Is Ekholm Ericsson's Savior or Seller? and Cost Cutting Must Continue, Says Ericsson's New CEO.)

But the ultimate goal, he insisted, is to amass capital for investment in future growth areas. "The priorities are to make sure we can invest enough capital in the areas where we must win," he told analysts earlier today. "We have strong R&D functions and product offerings but we must be competitive in five to ten years and that means having more attractive profitability."

Nevertheless, while Ekholm singled out 5G as an area in which Ericsson must be the market leader, he admitted that he has yet to come up with a clear vision for the company. "This is work we are doing right now, and I enter with some ideas, but the reality is that we need to make it a strategy we can execute on," he said. "It might be disappointing that we don't say this is exactly what we will do, but it is more important to make sure we can execute so please bear with us."

Ericsson has been toiling in markets beset by economic and cyclical slowdowns, as customers rein in spending on mobile networks in advance of 5G investment cycles. It has also failed to address the competitive challenge from Asian rivals, particularly China's Huawei Technologies Co. Ltd. (See Beginning of the End for Ericsson?)

Following a sequence of gloomy earnings updates, Ericsson dispensed with erstwhile CEO Hans Vestberg in June 2016, appointing Ekholm as a full-time replacement in October. (See Ericsson Appoints Investor AB's Ekholm as New CEO.)

But the task facing the new CEO -- an acolyte of the Wallenberg family, one of Ericsson's biggest shareholders through its Investor AB investment firm -- is immense. (See 10 Key Tasks for Ericsson's New CEO.)

Next page: Running to stand still

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James_B_Crawshaw
James_B_Crawshaw
1/26/2017 | 3:52:19 PM
OSS and BSS weakness
The YoY decline in OSS and BSS sales (both in Q4 and for 2016 as a whole) was blamed on the transition from legacy to new products. Does that mean new products are cannabalising the legacy Telcordia business? 

"We are allocating resources into our digital transformation projects to secure important deliveries in 2017." Are they so busy working on the Vimpelcom OSS/BSS transformation no-one is working on other projects and they missed project milestones with other customers?

Given that Support Solutions sales fell 17% for the full year and this was blamed primarily on OSS/BSS the decline there must be well north of 20% in calendar 2016. That contrasts with 2% growth in Amdocs' revenue in the year ending September 2016. 
djrod
djrod
1/26/2017 | 2:48:17 PM
Re: Strategy steps
Following the path of headcount reduction as cost-cutting measure, I have seen multiple times, when employees are fired and contractors step in (or the same person is moved from employee to contractor), there is a higher overall cost involved, usually in the range of 30%.

Usually there is a partner contracting firm acting as "middle-man", that is willing to hire anyone that is requested, and will happily invoice the resource's full compensation costs added by a hefty markup to cover the operation costs.

But in the end, nobody cares because near term targets are met - HC is reduced, the project keeps moving and (hopefully) delivered on time. Profitability will be affected, but people can be very creative when assigning variable costs.

Just my $.02

 

 

 

 

 
Ray@LR
[email protected]
1/26/2017 | 11:15:43 AM
Re: Strategy steps
Thank you for your insights jonh - maybe someone else has the same or an opposing view?

Either way, glad to hear you have a great job!
jonh97767
jonh97767
1/26/2017 | 10:06:06 AM
Re: Strategy steps
Yes, cost-cutting...

I worked for Ericsson. They fired a ton of people. Then an army of contractors rolled in. Project Managers would ask for things, which the contractors would not do. Rather, they would wait for Weekend to arrive and then say to the PM "Well ask my manager to approve me working during the Weekend".

The PM did not care at all, he himself was a contractor. So he would ask the manager for the contractor to work two days during the weekend. There go 1,000 pounds, right away. Time, after time, after time. For the entire three-year duration of the project. Who pays? The Customer. E/// just gets more and more expensive, as far as the Customer is concerned.

No control.

Nor the permanent staff care truly. As many times I tried to bring this up, people told me "Don't raise this issue, they (the management) will just say you are envying the contractors for their pay". They are only there, 30 years each of them, to get their pensions. There are no true staff performance reviews, with actual actions if people under-deliver. Just endless blah-blah-blah. ("Please promise you will improve, will you?" Well why rather not fire a couple?)

Ericsson also made a huge investment into th TV business, right when the entire planet was shifting online!

As far as all of us who we witnessed all that, "We didn't know, we weren't managers. The managers know". 

Well, here is where E/// mentality brought it to.

 

Lickly I quit, well on time. Got a great job. 
Ray@LR
[email protected]
1/26/2017 | 9:16:26 AM
Strategy steps
There are different steps in a strategy - short, medium, long-term... 

Ekholm has opted to stick to cost-cutting as the primary short-term statregic gola and it's obvious that 5G is the market that Ericsson needs to be a leader in.... what EVERYONE will be wanting to know right now, and this is probably more important for the ERIC staff more than anyone, is - what does the portfolio look like under the new CEO?

Are all the 'targeted areas' still key to the company?

Will video continue to be an are of key focus? What about OSS/BSS?

Is anything being ditched? Or does the company retain its current shape?

That all needs to be in the short-term communications - in my opinion... otherwise fear and uncertainty will eat away at this significant company.